Monday, June 8, 2009


Last week, the press really hammered at the unemployment rate growing to 9.4% - so much so, that it overpowered the more benign news (maybe even good news!) of a far-smaller-than-expected 345,000 drop in the nonfarm payroll.

The slightly more current information is buried in the nonfarm payroll report, which shows a declining pace of job destructiong. I really don't get the reluctance to internalize the "less bad" news: the unemployment rate depends on two things: the number of unemployed and the size labor force (which is unemployed plus employed), which makes it more of a lagged indicator.

In May, the labor force grew for the second consecutive month, +350,000. To be sure, those individuals went straight into the unemployed category, which helped to drive up the unemployment rate. But my point is this: that there will be fluctuations in the labor force that can grow the unemployment rate even after the nonfarm payroll is not falling anymore.

The chart illustrates the change in nonfarm payroll, and the unemployment rate at a 3-month lag (i.e., for each payroll shift, the associated unemployment rate is three months into the future). The correlation among this series is -0.33, while the correlation among the contemporaneous series is just -0.18 (current unemployment rate and current nonfarm payroll change). Shifts in the unemployment rate tend to lag the nonfarm payroll.

The fact that nonfarm payroll declined at a slower pace is a good sign. But don't get your hopes up: initial unemployment claims are well above the level that suggest jobs will be added next month... And furthermore, two economists at the Fed predict a significant "jobless recovery".

Rebecca Wilder


  1. All economic data collected reflects past events.

    Thus, all economic data is lagging from what is happening right now.

    Many believe that they can use collected data, which reflects the past) to foretell the future.

    Thus, they conclude such data as a "leading indicator".

    In this context, no such thing as a "lagging" indicator can exist.

    Either an indicator (a dial on the dashboard of the metaphorical economy vehicle) tells you the status of what's happening right now or it doesn't.

    For past data to be useful, you must connect it to where it affects future economic action.

    That said, unemployment does indicate the future of retail credit formation and hence retail sales for all kinds of things, from causal wear to cars and washing machines.

    Thus changes in unemployment acts as a leading indicator for the future state of retail sales.

    Those who deny this truth know little to nothing about economics.

  2. Hi Smack,

    unemployment does indicate the future of retail credit formation and hence retail sales for all kinds of things, from causal wear to cars and washing machines.

    That is most certainly not always true. Something always breaks the circle
    new fiscal policies (lower taxes, for example)
    an exogenous and positive shock to exports
    growing productivity that drives down prices
    falling energy prices
    growing asset markets
    population growth and household formation creates its own demand (slower, albeit)

    Can't think of more, but something always breaks the circle. That is why there is a bottom.